UK: Briefing Note - Annual Investment Allowance, January 2013

Last Updated: 1 February 2013
Article by Smith & Williamson

Introduction

This briefing note provides guidance on the computational aspects of the annual investment allowance (AIA) during periods where the limit of expenditure to which it applies changes. The limits are time apportioned around the dates of change, with transitional rules operating in some circumstances to prevent an unused allowance from before the date of change being used for expenditure incurred after the date of change. This briefing note covers the changes introduced by Finance Act 2011 and Finance Bill 2013.

In short, the detailed changes to AIA amounts cause computational complexity; reflecting that complexity in this note is unavoidable.

The annual investment allowance (IA) was introduced in Finance Act 2008 for qualifying expenditure incurred on or after 1 April 2008 for corporation tax purposes and 6 April 2008 for income tax purposes. It provides for a 100% allowance for expenditure within a set limit. This was initially £50,000 but was increased to £100,000 for expenditure incurred on or after 1 or 6 April 2010. Finance Act 2011 decreased the limit to £25,000 for expenditure incurred on or after 1 or 6 April 2012. Finance Bill 2013 has increased the limit to £250,000 for expenditure incurred on or after 1 January 2013 for a two year period before the limit falls back to £25,000 on 1 January 2015.

The examples in the tables below assume the full amount of AIA is claimable, and is not limited by the operation of restrictions set out in CAA01 s51B to s51K. Details of special provisions concerning how the restrictions are applied as a result of the Finance Bill 2013 changes are briefly discussed in the relevant section below.

Finance Act 2011 changes

The maximum AIA allowable is calculated as if the periods before and after the date of change were separate periods. However if the expenditure is incurred after the date of change, the amount of allowance for the period before the date of change is ignored. 2012 is a leap year. The following table assumes an accounting period for the year ended 30 June 2012.

Thus if £90,000 of AIA qualifying expenditure was incurred on 1 September 2011, the maximum AIA that could be claimed was £81,370 for a company and £82,393 for an unincorporated business. If the same expenditure was incurred on 25 May 2012 (with no previous AIA qualifying expenditure being incurred in the accounting period, then the maximum AIA that could be claimed would be £6,233 for a company and £5,890 for an unincorporated business. In each case the balance of expenditure would be allocated to an appropriate pool of plant and machinery.

FA2011 s11(11) provides that where more than two businesses with different chargeable periods share an AIA, the maximum AIA that a business can claim (as set out in CAA01 s51K) is reduced (but not below nil) by any amounts allocated to another business or businesses with the same or later (ending) chargeable period(s). This was necessary to ensure that businesses with accounting periods ending after the date of a business which had the maximum AIA to be shared among them all, were still limited by the maximum AIA on the assumption that only one claim could be made.

For example, if four companies in a company group with different chargeable periods ending in the financial year 2012-2013 were required to share a single AIA their individual maximum amounts might look like this:

The absolute maximum AIA that the companies can share is £93,850. However, FA11 s11(11) provides that companies C & D cannot each claim £25,000 AIA and if between them companies C & D did claim amounts totalling £25,000 then companies A & B's maximum claim would be reduced by £25,000. Similarly if company B did claim the reduced maximum of £18,750 following claim(s) by companies C & D, then company A could only claim the reduced balance of £50,100.

All the above depends of course on what companies may have done in earlier periods.

Finance Bill 2013 changes

Finance Bill 2013 changes the AIA limit to £250,000 for expenditure incurred on or after 1 January 2013. This is within 12 months of the previous change in limit and depending on the accounting period, it will potentially be necessary to divide a 12 month accounting period into three for AIA purposes. The Bill also provides that the increased limit will last for two years only, so it will be necessary to consider the implications on allowances for qualifying expenditure in the accounting period which straddles the 1 January 2015 date. The amount of the limit that can be used depends on when the expenditure is incurred. The following examples use a 31 January year end date.

Year ended 31 January 2013

The maximum AIA is calculated by considering the total of the limits in the accounting periods, time apportioned according to when the limits change.

These overall limits are subject to the following rules:

  • For qualifying expenditure incurred in period before 1 or 6 April 2012, the AIA limit is determined as if the increase to £250k did not happen. Thus the limit would be 60 or 65 days at the 100K rate and 306 or 301 days at the £25k rate, giving a limit of £37,352 for companies and £38,376 for unincorporated businesses.
  • For expenditure incurred in the period 1 or 6 April to 31 December 2012, the amount of any excess of qualifying expenditure incurred in the period before 1 or 6 April 2012 covered by the AIA limit after that date is deducted from the total AIA limit assuming the increase to £250k had not occurred (i.e. a maximum of 306 or 301 days at the rate of £25k (£20,959 for a company and £20,616 for an unincorporated business), subject to reduction if there was any excess AIA expenditure in the period pre 1 or 6 April 2012 over the £16,393 or £17,760 permitted as AIA for expenditure incurred pre 1 or 6 April 2012).
  • For expenditure incurred after 31 December 2012, the limit of expenditure qualifying for AIA is the appropriate proportion of the £250k allowance for the portion of the accounting period after this date plus the proportion of allowance for the period from 1 or 6 April 2012 to 31 Dec 2012. This would give a total of £40,011 for a company and £39,668 for an unincorporated business in this example.

For example, assume AIA qualifying expenditure of £25,000 had been incurred in February 2012, a further £25,000 qualifying expenditure in the month of June 2012 and £10,000 in January 2013. This is a total of £60,000 and the overall maximum AIA claimable is £56,404 for a company and £57,428 for an unincorporated business. The full amount of expenditure incurred in February 2012 would be claimable as AIA as this is within the total limit of £37,352 or £38,376. However this means the limit for the period before 1 or 6 April 2012 has been exceeded by £8,607 for a company and £7,240 for an unincorporated business. Thus the balance of AIA left to cover the £25,000 expenditure incurred in June 2012 is £20,959 - £8,607 = £12,352 for a company, and £20,616 - £7,240 = £13,376 for an unincorporated business.

At this point (i.e. pre 1 January 2013) a company will be able to claim £37,352 (leaving a maximum balance to claim of £19,052) and the unincorporated business £38,376 (leaving a maximum balance to claim of £18,552). The £10,000 incurred in January 2013 is within the limits of £40,011 and £19,052 for a company, and £39,668 and £18,552 for an unincorporated business for this period, and can therefore be fully claimed.

Thus in the above circumstances the maximum AIA claimable by a company is £47,352 and for an unincorporated business it is £48,376.

Where the whole £60,000 expenditure had been incurred at once then the following limits would apply:

  • If incurred in the period 1 Feb 2012 to 31 March or 5 April 2012 the maximum claimable would be 37,352 for companies and £38,376 for unincorporated businesses;
  • If incurred in the period 1 or 6 April 2012 to 31 December 2012, the maximum claimable would be £20,959 for a company and £20,616 for an unincorporated business;
  • If incurred in the period 1 January 2013 to 31 January 2013 the maximum claimable would be £40,011 for a company and £39,668 for an unincorporated business.

Year ended 31 January 2014

The maximum AIA claimable for this period for qualifying expenditure is £250,000

Year ended 31 January 2015

The maximum AIA claimable for this year is again time apportioned. However if the AIA qualifying expenditure is all incurred in a period when the £25k limit is effective (i.e. on or after 1 January 2015), then the unused balance of the allowance from before that date is lost as illustrated in the following table.

Operation of the limits where restrictions apply

Where restrictions apply due to associated businesses so that the AIA is shared between them, the maximum AIA for each business is first calculated. Only chargeable periods of 12 months or less can be considered in calculating this maximum. It is this largest maximum of any of the businesses which is the amount which is shared between them all, but each individual business may only claim up to its own maximum AIA.

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